Productivity: The Key to Competitiveness of European Economies and Enterprises

1) OBJECTIVE

To alert policy makers to the recent under-performance of the European Union in labour productivity growth, its causes and its implications for the goals set by the European Council in Lisbon in 2000. The Communication is limited to analysis of the field of new technologies and innovation and to related issues.

2) ACT

Communication from the Commission of 21 May 2002 on Productivity: The Key to Competitiveness of European Economies and Enterprises [COM (2002) 262 final - not published in the Official Journal].

3) SUMMARY

Definition

In formal terms, labour productivity is the quantity of labour required to produce a unit of a specific product. In the macroeconomic context, labour productivity is measured as a country's gross domestic product (GDP) per capita of employed population.

Productivity growth depends on the quality of physical capital, improvements in the skills of the labour force, technological advances and new ways of organising. Productivity growth is the principal source of economic growth.

Background

The Communication is part of the strategy adopted by the Lisbon European Council in 2000, the objective of which is to make the EU "the most competitive and dynamic knowledge-based economy in the world, capable of sustainable economic growth with more and better jobs and greater social cohesion". Current trends in EU productivity growth are not, at the moment, sufficient to attain the economic, social and environmental objectives set in Lisbon in the remaining years to 2010.

The recent slowdown in productivity growth in the EU will, logically, weaken European competitiveness. Enterprises will be competitive only when they can achieve sustainable growth in labour and total factor productivity that permit them to beat the costs per unit of output, and the non-cost characteristics, of other firms.

In addition, deceleration in productivity hampers improvements to the standard of living.

Productivity growth is these days significantly determined by investment in information and communication technologies (ICT).

State of play

During the latter half of the 1990s, growth in labour productivity in the European Union slowed down (from an average of 1.9 % in the first half of the decade to 1.2 % in the period 1995-2001), whilst employment growth picked up considerably (from a decline of 0.6 % in the first half of the decade to 1.2 % in the period 1995-2001). Employment expanded by 1.8% in 2000 despite the slowdown in the second half of the year.

There are marked differences between the Member States. Austria, Greece and Ireland have recorded constant productivity growth since 1990 at a level close to that of the United States. This is probably a reflection of the opportunity taken by these countries to benefit from the Internal Market following their accession to the EU.

Role of ICT

Information and communication technologies (ICT) are a core element of the knowledge society and an important complement to research and development (R&D). It appears symptomatic that those Member States recording rising productivity levels close to those of the United States are the ones where the use of ICT is pervasive. In other words, productivity gains are closely related to the use and diffusion of ICT. The productivity gap between the EU and the United States is in part a reflection of the lower levels of ICT spending here.

The importance of ICT derives from better processing of information and, thus, a reduction of the co-ordination costs which are unavoidable in a decentralised economy: most improvements have been made in the organisation of production, distribution and inventory management.

European manufacturing in recent years

In contrast to previous decades, the 1990s saw lower productivity growth in manufacturing in the EU compared with that in the United States.

However, the trend for capital-intensive industries (textile fibres, pulp and paper, man-made fibres, iron and steel, non-ferrous metals, etc.) has been positive.

In technology-driven industries (pharmaceuticals, chemical products, office machinery and computers, electronic and TV and radio transmitters, medical equipment, etc.), growth over the same period has also been notable.

Nevertheless, a comparison of EU figures with those of the United States shows that technology-driven industries represented around 35% of manufacturing value added in the United States compared to around 24% in the EU. These figures are symptomatic of the relatively low position of ICT compared with other industries within the EU.

Service sector in recent years

The problem of below average productivity growth which has been seen in all economic sectors over recent years is particularly pronounced in the service sector. However, it is difficult to measure production with any precision in this sector in an economic phase where changes in technology are extremely rapid. Even if the sector's share in the EU's GDP is rising, the implicit employment growth has not materialised sufficiently in the EU to improve the employment situation.

With regard to the importance of the service sector, the EU compares unfavourably with the United States. Given that the service sector is an important user of ICT, this is particularly indicative of the EU's slow progress in the area of new technologies.

In the service sector there are marked differences in productivity. Member States which liberalised and deregulated service sectors very early, like the United Kingdom and Finland, are likely to have had faster productivity growth than other Member States.

Human capital

A well-trained labour force is the key to the economy and productivity. Its quality is based on education, training and lifelong learning. However, recent years have seen a modest share of ICT knowledge amongst the working population, which has surely accentuated the problems of rapid ICT diffusion across the Member States.

At the same time, the demand for labour in the EU in recent years has shifted away from traditional skills towards modern and high-skilled human capital labour and this reflects changes in the content of jobs themselves. However, the increase in demand for more skilled labour is faster than improvements in the educational attainment of those entering the labour market.

Paradoxically, following the burst of the "dot.com bubble", it appears that the problem of skill imbalances may lose some of its urgency. However, given the speed of the on-going technological transformation, the skill intensity of our economies will increase. A network of coherent policies covering improvements in education, science, training, mobility, etc. will therefore be crucial in ensuring that the emerging demand for skills is met on a sustainable basis.

Enterprise policy and competition policy

The EC Treaty recognises the complementary nature of enterprise and competition policies. Thus the Lisbon goal calls for policies that establish an environment conducive to enterprise growth and innovation while ensuring that the market players are subject to uniform rules. On the one hand, competition induces firms to search for efficiency-enhancing solutions that lead to product and process innovation. On the other hand, enterprise policy corrects market failures and enables more firms to engage in market transactions while increasing their innovative potential.

Despite this complementary nature, attention should be paid to the different emphases of enterprise policy and competition policy. It is essential that a balanced approach be applied to take into account the different characteristics of the two policies:

appropriate delineation of the reference market with regard to the product or service and the geographic area;

co-operation between firms in the field of innovation;

business restructuring and mergers;

taking into account of the impact of technological development and innovation on future competitive conditions;

assessment of the legitimacy of certain State aid.

Enterprise policy and sustainable development

Even if European industry contributes economically and socially to sustainable development by creating jobs, inevitably it exerts pressures on the environment. Nevertheless, it is possible to combine economic growth with a reduction in environmental pollution. This has been the case in Europe for the manufacturing industry's energy consumption and emissions of acidifying gases, ozone-depleting gases and greenhouse gases.

Despite the undeniable costs for enterprises of implementing the environmental policy, it can also enhance competitiveness and economic growth by improving efficiency in production and creating new markets.

Conclusions

Economic growth will increase only if productivity rises. Improvements in enterprise productivity depend heavily on progress in ICT and innovation, and a labour force better adapted to the needs of industry.